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Motorists will welcome the prospect of an investigation into the car insurance market after years of spiralling premiums.

The Office of Fair Trading has found worrying evidence that drivers are being taken advantage of by parts of the insurance industry, who are exploiting the lack of control on costs in the market.

As a result hard pressed families, who are already facing a cost of living crisis and the effects of a recession made in Downing Street, are seeing insurance premiums being pushed up by £225 million a year.

The industry has tried to rely on revenue from the fees generated from referring personal accident claims to solicitors, inflating repair costs and hire car charges. Ultimately this strategy has come back to hit insurers hard as the cost of claims has risen rapidly; costs that have been passed on to customers.

She advised drivers to "shop around" until the Competition Commission reaches a decision on such practices.

Donna Scully, Chairman of the Motor Accident Solicitors’ Society (MASS), had this reaction to today's findings about the motor insurance industry:

Money is clearly being made from consumers behind their backs and MASS would welcome full disclosure of specific fee income on every case so that the consumer is fully informed. It is no wonder the whole sector has fallen into disrepute and that consumers are so wary of everyone who operates in it, and frustrated by exploitative practices they are likely to encounter when they make a claim.

For too long insurers have faced inflated rates for credit hire cars and excessive hire periods which have led to higher insurance premiums for customers. Regulation of all players in the market to tackle excessive costs is needed, and we hope that the work by the Competition Commission will bring much needed reforms that in turn will result in lower car insurance premiums for consumers.

Nick Starling, the head of general insurance at the Association of British Insurers, has said he hopes the Competiton Commission will look into some of the "dysfunctional" practices in the motor industry. He told BBC Radio 4's Today programme:

The whole market is ... dysfunctional ... There are structural issues here that only the Competition Commission can look at.

When pressed on which issues needed resolving, he said that referral fees to insurers needed to be abolished. He also mentioned clamping down on excessive hire fees and ensuring that replacement vehicles are equivalent to the car that was damaged, not more expensive.

The Office of Fair Trading has found evidence that motor insurance firms are driving up the costs associated with having an accident.

Most of this is being done by the insurers of the driver who is not at fault, who earn fees by referring the driver to rip-off car hire firms, repairers and even paint suppliers. Here are some examples:

John Fingleton, the Chief Executive of the Office for Fair Trading, said:

Competition in this market does not appear to work well for drivers. We believe the focus that insurers have on gaining the competitive edge through raising their rivals' costs means that drivers pay more than they need to for their motor insurance policies. Because insurers are distracted from competing primarily on the quality and value of service provided to insured drivers, incentives for greater efficiency may be reduced.